FY 2022/23 AND FY 2023/24 PROPOSED CAPITAL IMPROVEMENT PROGRAM BUDGET | BUDGET AND FISCAL POLICIES
BUDGET AND FISCAL POLICIES
We present the relevant policies and practices that define specifically the way the City manages its budget, reserves, interfund loans, investments, and debt with the goal of long-term fiscal sustainability. The City Council reviews and approves budgetary policies as part of the annual budget process. Investment and debt policy statements are referenced in this section; however, reviewed and approved by the City Council under separate cover.
Appropriation Control
The City Council is responsible for approving the appropriation of fiscal resources to cover estimated expenditures for each fiscal year. Expenditures are appropriated in each fund to departments, offices, and agencies for various goods, services, and capital projects described in the budget. The legal appropriation control is established at the department level in each fund. For select funds where expenditures are not allocated to a specific department, the appropriation control is established at the fund level. For capital funds, the appropriation control is at the project level. Transfers of funding between budgetary funds require City Council appropriation and approval. City Council approval is required for a budget amendment during the fiscal year which may include the use of reserves or fund balances, and approval of appropriations of grant monies. Per Article XIII, Section 1305 of the City Charter, appropriations lapse at the end of each fiscal year; therefore, unencumbered funds allocated for specific projects, donations, and grants require City Council appropriation for use in the following fiscal year.
Budgetary transfers between accounts or expenditure category may be done through Finance Department or City Manager’s Office approval as long as they are conducted within the legal appropriation control limit set by the City Council.
Balanced Budget
The City Council considers General Fund budget decisions with long-term implications based on information from the Ten-Year Financial Forecast. One-time sources are used to cover one-time uses. The budget is structurally balanced when forecasted ongoing sources cover ongoing uses. Budgets shall be structurally balanced to the extent possible. Reserves should be considered to balance a budget only in the context of a plan to return to a structural balanced budget.
Budget Monitoring and Reporting
Financial reports on actual performance in relation to budget are prepared by the Finance Department through monthly financial statements. These reports are prepared and presented to the City Council, per City Charter requirements (Section 802) the City Manager shall be required to keep the City Council advised of the financial condition and future needs of the City. City Departments are responsible for reviewing these monthly financial reports and identifying potential budget problems and recommending corrections through budget amendments.
Long Term Financial Forecast
The Finance Department prepares a Ten-Year General Fund Financial Forecast which is incorporated into the budget planning process and presented to the City Council annually. This forecast is updated annually and considers current and future economic conditions, revenue projections, and spending scenarios based on the
FY 2022/23 AND FY 2023/24 PROPOSED CAPITAL IMPROVEMENT PROGRAM BUDGET | BUDGET AND FISCAL POLICIES latest available assumptions. Capital improvement plans are created and published on a five- year basis to provide a long-term plan of the City’s capital funding plan.
Municipal Fees and Charges
User fees are reviewed and adjusted for on an annual basis with the goal of maximizing cost recovery. The City Council may consider and approve any fee that is below 100% cost recovery, requiring a General Fund subsidy if it is in the public’s best interest. User fees are adopted by the City Council annually through the Municipal Fee Schedule. Utility fees and certain other fees and assessments can also be approved separate from the Municipal Fee Schedule. Parks and Recreation fees are established by the Parks and Recreation Director and published in the Activity Guide.
Capital Planning
The City Council reviews and adopts a two-year Capital Improvement Program Budget which includes a five- year capital improvement program. Projects included in the capital improvement program are to be consistent with the City’s General Plan. Per State Government Code Section 65401, the Planning Commission reviews the capital improvement program for conformance to the City’s General Plan and proposes recommended considerations for the City Council. Funding sources are identified for all projects included in the capital improvement plan.
The Capital Improvement Program (CIP) is submitted by City departments and reviewed by the City Manager’s Office, the Finance Department, and the Public Works Department. The review process considers City priorities and identifies the most urgent projects for capital funding by program area, master plans, or needs assessments which identify the most critical projects for repair and replacement.
Department of Public Works staff reviews project estimates and evaluates the current bidding environment.
Project contingency reserves are established based on the type of project and the project estimate type (engineering or preliminary estimates). Operating and maintenance costs are identified for planning purposes when projects are completed and come online.
General Fund Reserves
The City Council allocates available resources to General Fund contingency reserves through various reserves designated for emergency use or restricted future uses. Restrictions are established by policy, or through legally segregated development-related fee reserves collected from users.
• Budget Stabilization Reserve (formerly the Working Capital Reserve) – is used as an allocation for weathering economic downturns, emergency financial cris es, or disaster situations. The reserve target is equal to the cost of the City’s General Fund operations for three months (90-da y working capital reserve).
• Capital Projects Reserve – is used to support the City’s CIP. The minimum target is $5.0 million with a goal of having sufficient funds to fund capital projects included in the City’s biennial capital budget and five-year CIP.
• Land Sale Reserve – this reserve allocates proceeds from the sale of City-owned land. • Building Inspection Reserve – allocates user fees in the Community Development Department’s Building Inspection Division. The funds from this reserve are used to fund i nspection services or projects directly
FY 2022/23 AND FY 2023/24 PROPOSED CAPITAL IMPROVEMENT PROGRAM BUDGET | BUDGET AND FISCAL POLICIES related to the Building Inspection Division activities. Funding can only be used to support user fee related activities when annual revenues are insufficient to cover annual expenditures. Individual user fees are included and approved under separate cover as part of the Municipal Fee Schedule. • Advanced Planning Fee Reserve – this reserve allocates a portion of user fees for the update and amendment of the City’s General Plan. Individual user fees are included and approved under separate cover as part of the Municipal Fee Schedule.
Utility Funds Reserves
The City conducts regular cost of service studies to evaluate rates and charges for each utility with projected needs and expenditures. The May 2018 water and sewer cost of service study included recommendations to establish a reserve policy in order to cover shortfalls in operating revenues, maintain strong bond ratings, cover day-to-day operating costs, and ease the burden on ratepayers associated with large r ate increases. The following reserves in the water, sewer and recycled water utilities funds address those recommendations:
The City is responsible for operating and maintaining several utilities, including electric, potable water, recycled water, and sewer. Regular cost of service studies are performed to evaluate rates and charges for each utility with forecasted revenue requirements and projected expenditures. One component of this analysis is the determination of adequate reserve levels to cover shortfalls in operating revenues, address unforeseen operating and capital expenditures, cover day-to-day operating costs during emergency situations, maintain strong bond ratings, and ease the burden on ratepayers associated with large rate increases. The following reserves address these needs:
• Operations and Maintenance Reserve – this reserve is used to cover day-to-day expenses, address unforeseen cost increases or revenue shortfalls, and protect against emergency financial crises or disaster situations. The reserve target is equal to the cost of the individual utility’s operations for three months (90-day working capital reserve). Due t o large fluctuations and variability in the energy market, the Electric Utility Operations and Maintenance Reserve has a target ranging from 90 to 180 days of operations. For the Electric Utility, the Operations and Maintenance Reserve, together with the R ate Stabilization Reserve (as described below), comprise the Electric Utility Rate Stabilization Fund established and maintained by the Electric Utility for purposes of its bond indenture.
• Infrastructure Reserve – this reserve is used to support each utility’s CIP or fund unforeseen and unbudgeted capital costs. The target minimum goal is a balance of the following year’s planned capital improvement program. The reserve target is equal to an average annual CIP budget, as calculated over a 48-month period of budgeted CIP expenses as presented in the Biennial Capital Improvement Program Budget. At minimum, t he target is to reserve 20% of the average annual CIP budget amount. For the Electric Utility, this reserve is based on an analysis of critical infrastructure, the likelihood for replacement, and the estimated replacement costs, evaluated regularly by SVP.
• Rate Stabilization Reserve – this reserve is used to absorb short-term revenue shortfalls and is designed to stabilize utility rates and avoid wide swings in rates charged to utility customers over time. The target minimum goal reserve target is a balance equal to 10% of each utility’s projected current year rate payer revenue. For the Electric Utility, the Rate Stabilization Reserve, together with the Operations and Maintenance Reserve (as described above), comprise the Electric Utility Rate Stabilization Fund established and maintained by the Electric Utility for purposes of its bond indenture. • Special Projects Reserve – this reserve sets aside funds for large or longer -term CIP projects or
FY 2022/23 AND FY 2023/24 PROPOSED CAPITAL IMPROVEMENT PROGRAM BUDGET | BUDGET AND FISCAL POLICIES other special purposes to lessen fluctuations in rates and support long-term planning efforts.
While no general target is established for this reserve, the amounts w ill be established by each utility based on need.
In addition to the reserves cited above, the City’s Electric Utility Fund has established rate stabilization and cost reduction reserves. These reserves are intended to stabilize electric utility rates and set aside as a buffer for unforeseen expenditures or revenue shortfalls.
In addition to the reserves cited above, reserves may be established to address specific needs or requirements of an individual utility. This may include required reserves in restricted funds, such as the reserves in the Electric Operating Grant Trust Fund for public benefits, low carbon fuel, and greenhouse gas.
Other Reserves
The City may include additional reserves set aside for specific purposes based on legal, policy, or budgetary purposes. Some of these include reserves for historical preservation, pension costs, vehicle or fleet replacement, workers’ compensation costs, or to fund potential future general liability claims against the City.
• Pension Stabilization Reserve – this reserve sets aside funds to address the City’s pension unfunded accrued liability. The targeted annual funding contribution is 1% of the City’s unfunded pension liability.
Interfund Loans and Advances
Interfund loans are loans from one City fund to another City fund for a specific purpose, with a requirement for repayment. Interfund loans should be short-term in nature and shall not be used to solv e ongoing structural budget deficits. The department managing the borrowing fund should complete the interfund loan agreement.
The agreement should include the amount requested, loan period, description of the loan, and repayment terms.
Interest shall accrue at the City’s pooled investment rate at the time of the loan approval. A summary of outstanding interfund loans are also included in the City’s Comprehensive Annual Financial Report. In addition, advances from the General Fund have been approved by the City Council that may be paid back by other revenue sources.
Investment Policy
The City undertakes investment related activities that are made with prudence. On an annual basis, the City formalizes these activities in the Investment Policy Statement which is adopted by a resolution of the City Council (https://www.santaclaraca.gov/home/showdocument?id=66753 ). The policy is to invest public funds, including
bond proceeds, reserves and other special City funds, in a manner which will provide the highest investment return with the maximum security while meeting the daily cash flow demands of the City and conforming to all state and local statutes governing the investment of public funds.
The City of Santa Clara Charter gives the Director of Finance the authority and responsibility to deposit and invest all City funds. It authorizes the Director of Finance to invest the City’s idle cash in allowable investment vehicles with a maximum remaining maturity of five years at the time of purchase. The City Council may grant express authority either specifically or as part of an approved investment program to invest in vehicles with remaining maturity that exceeds the five-year restriction. Authority must be given to the Director of Finance at least three months prior to the investment. California Government Code also allows the City to invest in the same investment vehicles as authorized by the City Counc il. The Director of Finance establishes written depository
FY 2022/23 AND FY 2023/24 PROPOSED CAPITAL IMPROVEMENT PROGRAM BUDGET | BUDGET AND FISCAL POLICIES and investment policy procedures for the operation of the investment program consistent with the City Investment Policy, establishes a process of independent review by an external auditor , and provides monthly investment reports to the City Council.
Debt Policy
The City believes that debt is an equitable means of financing projects and represents an important source of meeting fiscal responsibilities. The City obtains and maintains long -term debt for large capital improvement projects. The Finance Department manages the City’s debt with prudence, diligence, and attention to prevailing economic conditions and applicable laws. It manages issuance of debt, administers debt proceeds, prepares ongoing disclosure, handles debt and tax compliance, and makes debt service payments. City departments with debt-financed capital programs coordinate with the Finance Department in implementing and handling debt related transactions. Semiannual updates are prepared by the Finance Department on outstanding debt for the City of Santa Clara, its Agencies, and Corporations. This report is presented as a standard management practice that provides a valuable overview of the current status of the City’s long-term debt obligations. The current City Council approved debt policy can be found online at: (http://santaclaraca.gov/home/showdocument?id=63748 ).
Donation Policy
Donations may be offered in the form of cash, real or personal property. “Designated” donations are donations where the donor specifies intended use by a particular City department, location, or purpose. “Undesignated” donations are given to the City as a whole, for an unspecified use. Donations of any kind which might be perceived or interpreted as an attempt to influence actions of the City Council or City Administration will not be accepted. All donations are presented to the City Manager for compliance with the policy. As part of the annual budget process, for anticipated monetary donations, staff will bring forward for Council consideration a balanced appropriation for revenue and expenditures to facilitate the acceptance of donations throughout the fiscal y ear.
Donations valued at $100,000 or greater require City Council acceptance and appropriation of funds. Donations valued less than $100,000 may be accepted with the monetary donations available to departments for expenditure as part of the adoption of the annual budget. A report of all donations received by the City is presented to City Council as part of the Monthly Financial Report. The appropriation of anticipated donations can be found in each respective City department and corresponding Source and Use of Funds Statement in this document.
Community Grants Policy
The budget includes an allocation of $100,000 for Community Grants to offset the cost of City fees in support of the Council approved Community Grants Policy. Annually, and subject to availability of funds, the City Council shall establish grant appropriations as part of the approval of the budget. Community grants, subject to availability of funds, shall not exceed $10,000 per applicant, per year. To receive grant funds, grant applicati ons must be submitted at least 90 days before the planned event/activity being funded, regardless of the form of the grant, and will be evaluated by the City Manager’s Office on a case-by -case and “first come-first served” basis, throughout the fiscal year. Applicants are encouraged to submit their applications at the beginning of the fiscal year, for events or activities occurring at any time during that fiscal year, to maximize opportunity for availability of funds. The City Manager’s Office shall approve or deny an applicant’s request based upon eligibility criteria, and subject to funding availability as approved by the City Council through the adoption of the annual budget.
Grants for community events shall not be provided for waiver of or reimbursement for already discounted permit fees. Grants for attendance at youth state, national, or international competitions or performances shall be limited to costs of registration, hotel, transportation, and food for participants and coaches/chaperones only. Due to short notice to advance to state, national, or international competitions, applicants shall submit an application
FY 2022/23 AND FY 2023/24 PROPOSED CAPITAL IMPROVEMENT PROGRAM BUDGET | BUDGET AND FISCAL POLICIES within one week of advancing to such competitions. In all cases, the City reserves the right to reject any and all applications in the event the City Manager’s Office identifies a potential conflict of interest or the appearance of a conflict of interest. Submission of an application in no way obligates the City to award a grant and the City reserves the right to reject any or all applications, wholly or in part, at any time, without penalty.
Stadium Authority Policy
The Stadium Authority exists as a public body, separate and distinct from the City, and is established to provide for development and operation of Levi’s Stadium. It is structured so that the City will not be liable for debts or obligations of the Authority. The governing board duties and the fiscal policies that govern the Stadium Authority are included in the stand-alone Operating, Debt, and Capital Budget that is adopted by the Stadium Authority Board. This can be found at https://www.santaclaraca.gov/our -city/santa-clara-stadium-authority . This budget
reflects the revenues and expenditures related to the support of the Stadium and can also be found in the General Fund Non-Department section of this document titled Stadium Operations.
Policy Development
Staff has established this Budget and Fiscal Policies section in an effort to improve governance, transparency, and establish policies to govern the budget. These policies will be reviewed annually and enhanced as capacity allows.